The Feedback Effect of Disclosure Externalities

We investigate whether managers internalize the spillover effects of their disclosure on the stock price of related firms and strategically alter their disclosure decisions when doing so is beneficial. Using data on firm-initiated disclosures during all-cash acquisitions, we find that acquirers strategically generate news that they expect will depress the target’s stock price. The strategy leads to lower target returns during the negotiation period when the takeover price is being determined and results in a lower target premium. Our results are consistent with expected spillovers influencing the timing and content of firms’ disclosures.